3 ways to fight high fees in your 401(k)

By Glenn Ruffenach

Many people understand that high investment fees can undermine their retirement security. But a recent study shows just how devastating such expenses can be, and points the way to reining in costs.

Shutterstock

Just 1% in fees can cost you thousands of dollars.

The research by two law school professors – Ian Ayres at Yale University and Quinn Curtis at the University of Virginia – looked at investment options in more than 3,000 employer-sponsored 401(k) plans. The pair found that participants in an average plan paid almost a full percentage point more in annual fees than they would pay for low-cost retail index funds.

Worse, the fees in some plans were steep enough to all but wipe out one of the primary benefits of 401(k)s: the larger savings you build by making deposits in your account before taxes and deferring taxes on your investments until you withdraw funds.

There, you can plug in different combinations of stocks and bonds along with expense levels. The calculator then runs Monte Carlo-type simulations – which consider a vast number of scenarios – to estimate the odds that your particular nest egg will survive a 30-year retirement.

Read your statement. Department of Labor regulations that took effect in 2012 require your 401(k) plan to give you an annual statement that spells out how investments in the plan performed – and the fees associated with each investment. The Ayers-Curtis study found that many 401(k) plans that contained investments with excessive fees offered some lower-cost options on the menu, as well.

Look outside your savings plan at work. Yes, the investment options at work might be limited. But if you have savings outside your 401(k) – in traditional or Roth IRAs, or even in taxable accounts – you can take advantage of widely available ultra-low-cost investments, such as exchange-traded funds.

There’s no guarantee, of course, that paying, say, one percentage point less in fees will result in a corresponding gain in the return on your portfolio. But Morningstar research has shown that mutual funds with low fees tend to outperform their high-cost counterparts.

The take-away advice: Over the course of a retirement that could quite easily last three decades, monitoring fees and working to keep them as low as possible can increase your chances of enjoying a more financially secure retirement.

Story Conversation

About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.